Maintain ‘reduce’ on DCB Bank with a target price of Rs 86 per share. DCB has posted remarkable turnaround, but up-fronting of cost structure will strain return ratios and the breakeven of these costs will hold key. While we are confident about strong management, execution risks remain high owing to many variables.
In a major strategic shift, taking cognizance of rising competition, DCB has majorly up-fronted its branch expansion plans (150 branches will be added over next 24 months). Though we buy the bank’s strategy — a small bank like DCB has no option but to effect a major overhaul in strategy to fall in place with changes in the Indian banking landscape and make itself relevant- the consequential dent in return ratios cannot be overlooked given existing modest ratios. At 1.1x FY18e P/ABV the stock is fairly priced and given near-term subdued earnings.
DCB Q3FY16 PAT of `412 million (down 3% y-o-y) was marginally lower than our estimate following lower other income. Key highlights were 1) revenue momentum sustained with NII moving up >30% y-oy, above-industry loan growth and NIMs improvement; 2) slippages were controlled at 2.0% (2.4% in Q2FY16) led by SME, mortgage and agri segments; and 3) cost/income ratio continues to be elevated at ~60%.